Booking Losses, Keeping Profits and Holding on

My personal portfolio comprises with an exception of maybe one, all companies with market cap well below 1000 Crores i.e. small caps. Its verily a roller coaster ride.

Its easy to make money in the markets but harder to retain them over long term.

In analysis of past 18 months over mistake made and what could be improved upon.. Net of losses in Vikas WSP, holding on, Zylog – booked loss, Cravatex – a minor position now, the other small caps like Atul Auto, Wim Plast, RS Software, Orbit Exports etc more than made up the loss.

What have I learnt:

#1 is that in a small cap portfolio, the diversification needs to be wider

#2 Once the environment/underlying hypothesis has changed, eg: RBI legislation on gold curbs is effective. Do not be brave, err on the side of cowardice, cut all positions, sell all jewellery stocks

#3 Stay hungry and change with the times

By # 3 I do not imply lowering your standards but stop doing what does not work. The best part about investing is the limit on losses to 100% of investment and no upper limit on profits.Keeping Profits

That is only possible by being right and making fewer decisions. i.e. Holding for longer term. One simply cannot be right 50 times a year.

As you can see, with 3 out of 8 small caps misfiring, you may be correct in your assessment but if your temperament is to hold on to positions for ten years or longer many a spanner lie in wait for the compounding machine to break.

Holding On

Small caps rarely qualify holding on. There was a time when leading debt free companies were growing at 30% per annum and availableat 10 times earnings. Now leading companies are growing at 10-15% and available at 50-75 times earnings. eg; Dabur India, Nestle India, Colgate Palmolive India. Hardly a better alternative ?

A risk of leveraged financial institutions can be taken to get close to 20% compounding. All housing finance companies in India fall in this bracket.

Or alternate geographies where some leading companies are available at 10-20 times earnings. Reckitt Benckiser Bangladesh available for 300 Crores INR ( population adjusted value should be 9000 Crores INR if Bangladesh is to reach world average in next 15 years), Reckitt’s global market cap is 300,000 Crores INR. Bangladesh would be roughly 3% of world population in next 15 years.

GSK Bangladesh for 900 Crores INR (again 25 times undervalued on world average parameters), or Bata Bangladesh etc. look quite promising for buy-hold-and-retire type of investment. Just have a look at their balance sheets, overflowing with cash, needless to say zero debt. Just the kind that can sport 100%+ ROE. In IT speak they’re companies in Gartner Magic Quadrant with outstanding ability to execute with broadest vision.

My leaning has moved from small caps and focus is now on leaders available at mid cap valuations. Also I am encouraged by holding a concentrated portfolio which is more amenable to Global leaders. A different type of risk is assumed, country and currency.

Two quotes from Munger come to mind, not quotes verbatim but something on these lines “You are supremely rich if you hold shares of three best companies”. and“You are adequately diversified if you have biggest mall, best restaurant and best grocery store in a town”. What begs an answer also is, would you buy a company that is successful and has a leadership status in one state of a country ? (eg: Thangamayil, Atul Auto), or a leadership in one country (eg: Dabur, Havells, Emami, TTK), or leadership in over 150 countries ? (eg: Colgate, Unilever, Reckitt, GSK), isn’t that an easy answer…

If you do not know the process of investment in Bangladesh, feel free to ask.

Disclosure: Vested interest in Bangladesh stocks mentioned.

EDIT: Unilever Nepal available at 2 times annual sales. Unilever India available at 5 times sales. GSK India available at 6 times annual sales. GSK Bangladesh available at 1 times sale. GSK Global is bigger than Unilever, both are no-brainers IMO.

Fully agree with your view on diversification in case of small and micro caps. Do you have any percentage limit for individual stocks or for group of stocks as a whole in case of micro and small caps….

Secondly in case of housing companies, I am struggling to understand whether it make sense to invest. Like gold again this a sector which suffers from investor madness like “Real estate prices can never fall” and atleast now some people have started accepting the view that there is some bubble in real estate prices. What happens as and when this bubble gets burst… Secondly because of increased enthusiasm of all NBFCs to fund real estate sector, will RBI so something which it did to gold loan companies…..

My focus is no longer micro caps but MNCs in developing countries which I feel can go up to 20-30% of portfolio as they have dozens of brands. Bajaj Corp is single product company but Unilever has 100+ brands

20 – 25 stocks in small caps should be enough and even then my selection may not be right.

Property: Not sure about bubble. It is expensive but not a bubble in my opinion as there aren't vacant/empty cities in India unlike China. I think quality of life is quite poor for the amount of money invested in real estate but India has so less land per person. I was reading how apartments in Mumbai are more expensive than ones in Manhattan. In my opinion any suffering will be apartments priced in crores not in lacs. HDFC and Banks have most to suffer and low income housing institutions with loan below 20 lacs per property have not much to worry, in my opinion.

Great to see your different perception on investing and it does makes sense to invest in these leaders available at midcap valuations. Do you have any other scripts in your radar which can be considered like BATA Bangladesh, GSK Bangladesh, Reckitt Bangladesh etc.. I am more convinced with Unilever Nepal but unfortunately there is no easier way to invest there 😦

I consider this four stock portfolio you just mentioned to be adequate diversification and should comfortably surpass all stock indices, small, medium, large over next 15 years. So, for me its staggering and breathtaking portfolio. I have mentioned two more stocks in the Past. Crown Paints Kenya, Streamships Trading Company Ltd – Papua New Guinea Anyone should be easily able to buy 5 out of 6 stocks above. Actually I will not be surprised if you even beat Rakesh Jhunjhunwala's portfolio over next 15 years with above stocks.

—————————————————————————————An interesting story I recall. There was a disciple who pestered his cosmic conscious Guru for second step of Yogic practice to which he was frequently turned down. This would happen every few months. Finally, Guru relinquished and pointed this disciple to have conversation with another disciple who was practicing first stage whose comments were, “This first stage is so intense and rapturous that hair all over my body stand on their end, I am hardly able to accommodate thousand volts of cosmic current in fifty watt of bodily bulb and may have to wait several months or years before I even contemplate asking Guru for the next stage, I am too overawed and over whelmed with the joy and elation to want anything else”.

You also probably do not understand the size of GSK. Same as/bigger than Unilever. It is 130 Billion USD market cap globally. ONGC/Reliance/Infosys are 30-40 Billion USD market cap.

GSK India is available for 40,000 Crores (Consumer + Pharma). GSK Bangladesh does both business as listed entity. Bangladesh has 1/7th the population of India. 1/7th of 40,000 Crores is about 6000 Crores INR. But GSK is available for only 900 Crores, cheap by Indian comparison too.

In my case bet is not on economy but company, only on country not going to Zero/Bankrupt. Being economically poor already is an added incentive, is why rural India growing faster than urban India, is why India is growing faster than developed countries. Nepal may rank far below India maybe 170th out of 190 countries yet you have a 50-100 bagger amidst Maoists, Insurgency, Monarchy. I feel there is no need to invest overseas if investment horizon is only 1-2 years.

Indian FMCG companies like Marico & Dabur have significance presence in these countries (Nepal & Bangladesh) this itself indicates the long term potential of these countries.

But the un known risk is “political situation”,how stable in these countries ? look at egypt & syria.How good is their leaders in taking the country going forward.15- years down the line whether these countries will consider as an emerging growing markets ?

there is an uncertainty and market considering this fact and valuing these companies accordingly.

In my opinion a good company to own is one you cannot sleep without owning a part of, rather than ardous analysis for a small gain. You should loseyour sleep until you own a part of it. Investment urge has to be so forceful as to require no questions.

Repco home is at an all time high. What other small caps would you recommend at the moment from india or australia stock market. I am jus looking at options to diversify if I dont want to lut money in bangladesh or kenya.Thanks. I have already invested in capilano and sst. Thanks.

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Amit Arora

B.Com(Hons) Gold Medalist - Delhi University, MBA.

Served United Nations between 2001-2006 in Europe.

Since 2007 consultant for Inland Revenue, Ministry of Economic Development, Ministry of Social Development, Ministry of Justice, Ministry of Business Innovation and Employment (NZ Govt. Organisations).